Tax Q&A: Will CGT be calculated on the original purchase price?

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Q: I have a question on the capital gains tax calculation for an investment property. My wife bought a two-unit dwelling (duplex) with her family in 1999. They tenanted the property for four years while plans were being processed by the council to demolish and build a three-unit dwelling. Each member of her family took ownership of a unit. We lived in our apartment for one year until 2004 and have rented it out ever since.

I expect that my wife will have to pay CGT from 2004 until we sell the apartment or move back in. However, will CGT be calculated on the original purchase price of the duplex, the cost of construction of the apartment (ie total cost divided by three), or the value of her apartment when we started to tenant it?

Thanks, David

A: The cost base of the property will depend on whether there was a partial change in ownership between your wife and her family members when the three-unit dwelling was constructed.

Based on the information provided, we assume there were three purchasers of the duplex: your wife and two other family members. If no change of ownership of any kind occurred, the cost base of your wife’s unit would be an appropriate apportionment of the original purchase price of the duplex in 1999, plus an appropriate apportionment of the construction costs up to 2003. The market value substitution rule (where you’re taken to have received the market value of the asset at the time of the CGT event) would not apply.

As the unit was once a main residence, it can be treated as a main residence for up to six years after you moved out in 2004

However, if your wife and the other two family members jointly owned the entire original duplex, and then your wife and each other family member took 100% ownership of their own units upon construction of the three-unit dwelling, a CGT event would have been triggered for each owner of a unit in the three-unit dwelling.

Essentially, your wife would be considered to have disposed of a one-third interest in each of the other two units in exchange for acquiring the remaining two-thirds interest in her own unit. If this is the case, then:

  • one third of your wife’s interest in her unit would be based on an appropriate apportionment of the original purchase price of the duplex in 1999, plus an appropriate apportionment of the construction costs up to 2003
  • the remaining two-thirds interest in the unit would be based on the market value when the property was first rented out in 2004. This is because, this portion of interest in the unit relates to the property being first used as a home (albeit for one year) before later producing income, and therefore the market value substitution rule applies

As the unit was once a main residence, it can be treated as a main residence for up to six years after you and your wife moved out in 2004, according a partial main residence exemption for the CGT calculation.

Also note that there are exemptions and rollovers in the CGT rules regarding converting property to strata title, although the application of those rules will depend on the nature of the specific arrangement. To provide a full and complete answer, we would require a more complete understanding of the circumstances. Be sure to seek a registered tax agent to assist you with your tax affairs.

Need to know

  • The cost base of a property depends on its ownership status
  • A property can still be treated as a main residence after the owner moves out.
  • There are exemptions in the capital gains tax rules for properties being converted to strata titles.

 

David Shaw
is CEO of WSC Group

 

 

Have you got tax queries regarding your property investments and wealth creation strategies? Our experts are on hand to answer them.
If you would like your tax question answered in our magazine or on our website, please email your question to: editor.yipmag@keymedia.com.au

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